Proposition 1: In a Ponzi scheme, the people who invest early get their money out with dividends. But these dividends dont come from any profitable or productive activity  they consist entirely of money paid in by later participants.

This cannot go on forever because at some point there just arent enough new investors to support the earlier entrants. Word gets around that there are no profits, just money transferred from new to old. The merry-go-round stops, the scheme collapses, and the remaining investors lose everything.

Now, Social Security is a pay-as-you-go program. A current beneficiary isnt receiving the money she paid in years ago. That money is gone. It went to her parents Social Security check. The money in her check is coming from her sons FICA tax today  i.e., her investment was paid out years ago to earlier entrants in the system and her current benefits are coming from the investment of the new entrants into the system. Pay-as-you-go is the definition of a Ponzi scheme.

So whats the difference? Ponzi schemes are illegal, suggested one of my colleagues on Inside Washington.

But this is perfectly irrelevant. Imagine that Charles Ponzi had lived not in Boston but in the lesser parts of Papua New Guinea where the securities and fraud laws were, shall we say, less developed. He runs his same scheme among the locals  give me (invest) one goat today, Ill give (return) you two after six full moons  but escapes any legal sanction. Is his legal enterprise any less a Ponzi scheme? Of course not.

So what is the difference?

Proposition 2: The crucial distinction between a Ponzi scheme and Social Security is that Social Security is mandatory.

Thats why Ponzi schemes always collapse and Social Security has not. When its mandatory, youve ensured an endless supply of new participants. Indeed, if Charles Ponzi had had the benefit of the law forcing people into his scheme, hed still be going strong  and a perfect candidate for commissioner of the Social Security Administration.

But theres a catch. Compulsion allows sustainability; it does not guarantee it. Hence . . .

Proposition 3: Even a mandatory Ponzi scheme like Social Security can fail if it cannot rustle up enough new entrants.

You can force young people into Social Security, but if there just arent enough young people in existence to support current beneficiaries, the system will collapse anyway.

When Social Security began making monthly distributions in 1940, there were 160 workers for every senior receiving benefits. In 1950, there were 16.5; today, three; in 20 years, there will be but two.

Now, the average senior receives in Social Security about a third of what the average worker makes. Applying that ratio retroactively, this means that in 1940, the average worker had to pay only 0.2 percent of his salary to sustain the older folks of his time; in 1950, 2 percent; today, 11 percent; in 20 years, 17 percent. This is a staggering sum, considering that it is apart from all the other taxes he pays to sustain other functions of government, such as Medicare, whose costs are exploding.

The Treasury already steps in and borrows the money required to cover the gap between what workers pay into Social Security and what seniors take out. When young people were plentiful, Social Security produced a surplus. Starting now and for decades to come, it will add to the deficit, increasingly so as the population ages.

Demography is destiny. Which leads directly to Proposition 4: This is one Ponzi scheme that can be saved by adapting to the new demographics.

Three easy steps: Change the cost-of-living measure, means test for richer recipients, and, most important, raise the retirement age. The current retirement age is an absurd anachronism. Bismarck arbitrarily chose 70 when he created social insurance in 1889. Clever guy: Life expectancy at the time was under 50.

When Franklin Roosevelt created Social Security, choosing 65 as the eligibility age, life expectancy was 62. Today it is almost 80. FDR wanted to prevent the aged few from suffering destitution in their last remaining years. Social Security was not meant to provide two decades of greens fees for baby boomers.

Of course its a Ponzi scheme. So what? Its also the most vital, humane, and fixable of all social programs. The question for the candidates is: Forget Ponzi  are you going to fix Social Security?

Someone here educated me last week on life expectancy numbers. They are much higher now because the infant mortality rate is so much lower. If your life expectancy figures for today and a hundred years ago only inlude people who make it to, say, age 18, people really are not living all that much longer.

Heck, the bible says the life of a man is 70 years. Those that don’t die in childhood, that is.

“Of course its a Ponzi scheme. So what? Its also the most vital, humane, and fixable of all social programs. The question for the candidates is: Forget Ponzi  are you going to fix Social Security?”

Excellent question, especially for those who have paid into it for 35 or forty years at gunpoint, not out of greed, which of course, is the point of the article. This is far worse than a Ponzi scheme.

The headline is enough to make you pretty angry. I first thought it meant he was saying so what, like it was no big deal. You can’t read his stuff lightly, can you? The mandatory component of this is what really should make people riot, with ZeroCare on the way. It compounds the Ponzi felony. We weren’t enticed by profits, we were robbed at gunpoint. Just as we will be with ZeroCare.

Someone here educated me last week on life expectancy numbers. They are much higher now because the infant mortality rate is so much lower.

Here's some more info: yes, infant mortality rates are part of the explanation; but the biggest contributor to longevity from the 1930s to the present has been antibiotics. Almost everyone used to die of infections like pneumonia. Now they survive those infections. It is a very direct correlation.

“In the meantime, you should have been eligible for SS but have to wait 5 more years to get it. Is that what Americans will have to look forward to from now on?”

I don’t think anyone is suggesting they raise the age tomorrow. They are talking some 15-20 years out, by many tables and another year for shorter terms. That would correct the problem, by offering those under 40 to opt into a VOLUNTARY combination of public/private savings account. The public part would support the ongoing cost, the private (naturally) would yield higher dividends to pay them out in the out years.

Your post made me think. I think a “valid” statistic would be one that answers this question: What is the life expectancy of those that make it to 60?

I’ve noticed that the older you are, the longer the actuarials say you will live. Nobody ever tried to get life insurance and the agent says, “Sorry. the actuarials say you died last week. I would not be surprised if a 100 year old man has a life expectancy to 106.

Come to think of it, comparing actuarial tables from 1940 and 2011 would give us a glimpse of what changes have really taken place.

You dont fix a Ponzi scheme. OK so it will just be a slightly better ponzi scheme?

We need a system of private accounts where each person has his own account invested in CDs and bonds. We have tried to argue for this before. But I would NOT however do the whole stocks thing because 1) we have 401ks for that and 2) Democrats will not be able to demonize CDs, bonds and money markets.

Once that risky stock argument goes away, how can they argue against a fully funded system that still makes more money than SS and can be passed down to your heirs?

Dr. K is, as usual, confused. Social Security isn't much more mandatory than the classic Ponzi scheme. The government can only “force” people to participate as long as people keep voting to be forced. When enough people realize it's a fraud, they can just elect a government that will release them from it, which is exactly what they will ultimately do. Social Security is an empty promise that will be broken — guaranteed.

There's no way to fix SS and it isn't humane at all. It is just a thin veil thrown over the confiscation of a large part of America's retirement savings. SS will have to be abolished (probably in several stages) along with the payroll tax and replaced with an honest welfare/income support program for the elderly financed out of the general fund. No government can keep a promise to care for everyone. It's civilizational suicide.

12
posted on 09/16/2011 7:55:41 AM PDT
by fluffdaddy
(Who died and made the Supreme Court God?)

“Here’s some more info: yes, infant mortality rates are part of the explanation; but the biggest contributor to longevity from the 1930s to the present has been antibiotics. Almost everyone used to die of infections like pneumonia. Now they survive those infections. It is a very direct correlation. “

Don’t tell Michele Bachmann. According to her, modern medicine is the spawn of SATAN!!!!

I’m reading a Michner book called Chesapeak. It starts with the life of an indian in the 1600’s and follows the inhabitants from there based, somewhat, on actual records.

We have it so easy now as to be downright laughable. If the only hardship is that they increase the age at which people can get ss, it is but a blip. I admit I’m using a semi-fiction book to illustrate this, but my belief is that we are about to go down so hard that in a few years people will yearn for the world in which we currently live and the addition of higher SS with NO hope of getting any back.

No, I’m not predicting Mad Max. More of a post WWII europe sort of thing, with elevated gamma rays maybe.

SS is a Ponzi scheme insofar as most participants have the impression it’s a “money in -> money invested -> money out” plan, that somehow it’s their money they put in which they’re getting out (with paltry interest, of course).

SS isn’t a Ponzi scheme insofar as the “investment” form is long gone (if it ever existed; I’m still researching that), at it is nothing more than a straight “you pay money in today, someone gets money out tomorrow” redistributive tax, and anyone exerting any attempt to understand the program understands this.

The former amounts to felony fraud, the other amounts to normal taxation.
The difference is mere semantics. Which you choose depends only on whether you’re a member or target of the coming lynch mob.
Either way, we soon won’t have enough money coming in to pay money going out, and that point is a lot sooner than alleged because the so-called “trust fund” bonds in question are paid out of the general fund which is already spent twice over.

The government can also only force people to pay from taxable income. Those that have found alternate methods of income can affect the equation. Greece has this problem. There is a huge underground cash only economy that is never reported. The amount of tax dollars not collected is staggering. When taxes become punitive, people either stop producing or they figure out a way to produce just enough to survive without the government getting a cut.

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